Fed Has Brought Forward Their May Meeting Moves... Curve Steepening
The Fed, with their detailed FOMC minutes and their view towards a 50 basis point move in May, has brought forward most of what we can expect from the May 4 meeting result... The yield curve is starting to worry that the massive Fed QT numbers, or expectations of numbers, will halt the yield curve flattening... 2/10, which had been inverted, is now 18... 5/30, which had been inverted 15 basis, is now only inverted by 1 and will probably go positive at some point today...
Overnight and after the minutes, the markets have been trying to figure out which way to go... For treasuries it looks like the long exposure of the street, with flatteners, is vulnerable... As is the massive profits from being short the front end... Nonetheless 10 years hit a low yield at 3.23 am of 2.55 and then quickly zoomed up to 2.62, which is where we are now... The question is what happens next... Many do not seem to believe the Fed Balance Sheet moves will move the curve steeper, we disagree and see that is happening in front of our eyes currently...yesterday's support on 2/5's seem to have come back into play, 2.51 and 2.68... But to be safe we will move support to yesterday's high yield of 2.60 for 2 years and 2.80 for 5 years, respectively... 10 years hit a 2.66 high yesterday, so that is our first support, but if we are right, 2.75 is a better support number... And for long bonds 2.68 is the first support, but 2.78 seems like a better number as longs and flatteners get stopped out...
Balance Sheet.. 95 billion a month, to get started next month, but only gradually get to the 95 number over the next 3 months... 60 billion of treasuries, which will be focused on coupons, as those coupons will not get reinvested in treasury auctions, like they have been in the past... If there is not enough coupons to mature, then they will use bills.. As for mortgages, the run offs have been decreasing as mortgage rates have gone from 3.30 at the beginning of the year to 5% now.. But what runoff there are, the Fed will use up to 35 billion to unwind... They will eventually have to sell mortgages to keep the percentages inline, but we do not expect to see any outright selling until at least the end of the year... We expect mortgage spreads to widen further.
Equities... Here we are worried... Given our view that equities were ok until the Fed meeting on May 4 may have to be revised.. As we said previously, the Fed has brought forward next months results... 50 and B/S details... What more can we expect from the Fed on May 4?... All the Fed governors, including the perma dove Brainard, are all pulling the same way... INFLATION IS PARAMOUNT... But as we said in a TV interview yesterday, and will probably say again today that the inflation is dominated by supply side issues... Which we see getting better based on ship and trucking data... Of course the energy and food situation, due to Ukraine and Russia, will not be resolved any time soon...and the Chinese lock-downs, which help with the price of oil, are not helpful across the goods spectrum...
Corporates... Spreads a little wider and new issues are coming to a halt as corporate treasurers try to figure out the next moves....only one issue yesterday... Secondary trading has dropped off to 27 billion in IG, off from the 45 billion we saw last week. A drop of 40%.
Where are we going?.. We expect choppy markets as the Fed dynamics and the street positions get adjusted... The DUMB position of the Fed, which we saw in a Bill Dudley op ed yesterday, is that the Fed needs to crush the economy to get a soft landing... Many, even our friends at Stifel, put out an equity overview where they think the Fed will start to ease again at the end of this year.. Doubtful... But our view is that the Fed will move more slowly and use the B/S to adjust rate rises by 4 25 basis moves... So it should be interesting...